SEC sues SIPC over Stanford Financial investments (Updated)

The Securities and Exchange Commission, in an unprecedented move, sued the insurance fund for U.S. brokerage accounts, asking a court to compel the fund to cover losses for some investors who lost money in Allen Stanford’s alleged $7 billion Ponzi scheme.

The lawsuit comes after months of behind-the-scenes haggling failed to resolve a dispute involving coverage by the Securities Investor Protection Corp., which has resisted covering losses in the 2009 collapse of Stanford Financial.

In filing the lawsuit, the SEC said:

Because SIPC has declined to take steps to initiate the proceeding for the protection of Stanford customers, the Commission filed suit today asking a court to compel it to do so.

SIPC, meanwhile, has argued that the investments sold by Stanford don’t qualify for SIPC coverage, a position echoed by the securities industry. Attempts to reach an agreement between the SEC and SIPC, apparently broke down last week. SIPC presented the SEC with a settlement offer, in which the fund would have agreed to repay investors for a portion of their losses. The SEC found the proposal unacceptable, according to a person familiar with the discussions.

At a closed-door meeting Wednesday, the commission decided to proceed with the lawsuit, the person said. SIPC could still come back with another settlement proposal.

“Many folks in Louisiana and along the Gulf region lost their life savings, and it’s time to get even tougher in our fight for the victims,” Sen. David Vitter, R-La., said in a statement. “I’ve been urging SIPC Chairman [Orlan] Johnson to act quickly for months but the victims still haven’t received an up-or-down answer. This move by the SEC is encouraging and should significantly help the process.”

Last week, Vitter, who’s been a vocal proponent of Stanford investors, called on SEC chairman Mary Schapiro to proceed with the lawsuit.